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In-line revenues with high base, profits disappoints

Kalyan’s Q4FY22 performance was in-line; off high base, consolidated revenue/ EBITDA/PAT declined 6.5%/4.1%/2.5%. Management alluded, in the face of Omicron disruption in Jan/Feb coupled with volatility in gold prices, it saw strong footfalls in Mar driven by pent-up demand across markets led by festive season. India revenues declined 8.3% led by non-south markets (+8.3%) outpaced south markets (-15.9%). The share of studded jewelry improved to 24.3%. Middle-East revenues remained flat at Rs4.25bn. E-com channel, Candere grew 78%, while gold coin sales made up 2.9% of revenues. Gross margin expanded to 15.6% (+30bp); EBITDA declined 4.1% to Rs2.2bn due to high ad-spend (+79%), and other expenses (+17.8%); EBITDA margin grew 20bp to 7.6%. Considering FY22 performance we have revised FY22E/FY23E earnings and retain BUY, with a revised DCF-based TP Rs101 (implying 28.8x FY24E EPS).

High base and Omicron disruption impacted operations in Jan/ Feb impacted growth

Notwithstanding Omicron disruption in Jan/Feb and off high base (+42.8%), Q4 consolidated revenue declined 6.5%. Non-south markets grew 8.3%, while south markets declined 15.9%. Studded jewelry contribution remained flat at 24.3% to top-line, while plain gold jewelry declined 10.6%. Weak consumer sentiment and lower tourist footfall resulted in flat revenues for Middle-East business. Management alluded that growth was satisfactory as it witnessed, (1) improved consumer traction in Apr/May led by Akshay Tritiya and pent-up demand, (2) stability in gold prices, (3) improved consumer sentiments, and (4) consolidation on account of hallmarking-related shift from small players. Store expansion targets remain strong: ~15 stores (added 17 stores in FY22). Candere online platform grew strong at 78% to Rs390mn

Cost savings coupled with operating leverage to expand margin; FY22 saw strong growth

Gross margin at 15.6% expanded 30bp YoY, as 95% stores were operational in Q4. That said, Kalyan saw continued traction for studded collections targeted for first time buyers. EBITDA declined 4.1% to Rs2.2bn due to high ad-spend (+79%), and other expenses (+17.8%); EBITDA margin at 7.6% (+20bp). Exchange of old gold stood at 30.5%, while gold metal loans remained at ~30%. Management intends to expand gross margins by 200bps through strong operating leverage and improved throughput. Company is planning to pilot 6 franchise stores in nonsouth market under FOCO model soon. Further company is planning to build new platform by opening stores under Candere connecting its rising customer base for low cost studded jewelry. However, it maintained that A&P spend would remain at ~1.8% of sales. In FY22 revenue/EBITDA grew 26.2%/37.1%; PAT at Rs2.2bn saw strong growth over reported loss of Rs61mn in FY21. Management expects FY23 would continue to see strong pent up demand.

Valuation driven by potential earnings upside

Off high base, the operating performance was in-line given Omicron disruption. We note Kalyan’s strategy revolves around store opening in non-South markets, improving studded ratio, serving millennials with online format, and meeting their aspirational demand by introducing new designs. We maintain a positive view and expect faster recovery and margin gains to drive upsides. Considering FY22 performance we have trimmed earnings for FY23E/FY24E by 32.2%/29.9% and retain BUY, with a revised DCF-based TP of Rs101 (implying 28.8x FY24E EPS). Risks: irrational competition; prolonged recovery in the economy, leading to lower demand for jewelry; rising gold prices.

Valuations

Off high base, the operating performance was in-line given Omicron disruption. We note Kalyan’s strategy revolves around store opening in non-South markets, improving studded ratio, serving millennials with online format, and meeting their aspirational demand by introducing new designs. We maintain a positive view and expect faster recovery and margin gains to drive upsides. Considering FY22 performance we have trimmed earnings for FY23E/FY24E by 32.2%/29.9% and retain BUY, with a revised DCF-based TP of Rs101 (implying 28.8x FY24E EPS). Risks: irrational competition; prolonged recovery in the economy, leading to lower demand for jewelry; rising gold prices.

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